Contract: A prenuptial agreement or a marital vow?
Today, contracts are mostly viewed as a prenuptial agreement with focus on obligations, penalties and exit clauses. They primarily cover what should happen when things go wrong. Instead, contracts should be looked at like marital vows, giving all stakeholders an opportunity to adjust, change and adapt - a handbook for making it work.
Mattais, any thoughts on that so far?
Host Matthias Toppert is joined by Richard Beaumont, Managing Director at Bromley Wood Associates, and ex VP of Procurement at Rolls-Royce. They discuss how different teams covering legal, procurement, commercial and contract management can align and work towards a common goal.
Matt: Hello, I am Matt and I would like to welcome you all to Clause & Effect, a podcast presented by SimpliContract. Joining us today is Richard Beaumont. Richard is an internally renowned procurement practitioner and business advisor with over 30 years of experience across different industry sectors. Richard is Founder and Managing Director of Bromley Wood Associates, a consulting firm with a focus solely on procurement and supply chain topics.
Richard, your career spanning from that of an Army Officer to McKinsey Consultant to Head of Procurement and Chief Procurement Officer at Rolls-Royce among multiple other roles that you have held in different organizations across different industries sectors. We are super glad that you could join us today and I am very very excited to have this conversation with you today about the ins and outs, tips and tricks, requirements in contract management in today’s modern procurement organizations. Great having you today.
Richard: Well, Mattias, I’m delighted to be here too. It’s always a pleasure to talk about, something that’s perhaps on the periphery of procurement, but actually should be at the heart of it.
Matt: So, when you say periphery, I find it very interesting. It almost sounds, if I’m putting a spin on it; contracting is a dirty word in the procurement community. How do you see this Richard on the backend of your experience of nearly 30 years across different industries, across different types of organizations, different sizes. What’s the basic role of contracts today? How is it perceived? And, maybe how should it be perceived.
Richard: That’s a great question. Let’s just paint a picture of let’s see how this might run in any kind of organization. Particularly in large organizations, who are implementing complex products, and particularly services. If we think about it, I mean, let's imagine the scene where we're going to be doing perhaps a big outsource of our IT infrastructure. So data centers, network maintenance is all going to go to a third party. This is scary stuff for a business that's outsourcing for the first time, they're terrified about loss of control, or whether they're going to get what they need, for the outsourcing party, they might be quite familiar with it.
But if they're taking on perhaps a client in a regulated industry, they're going to be worried as well, because they're going to be on the hook. So how does this run? Typically, there's a requirement, the procurement team gets involved, and then we start the dance. And we'll start with some kind of RFI RFP, we'll do a down-select, we'll find maybe a couple of selected partners that we're interested in, we'll get to a negotiated agreement. And that's kind of the point at which procurement begins to exit stage left, it doesn't completely, but it's still there. Because the next bit is actually the really hard bit, which is capturing everything that everybody set out to achieve in all of those wonderful discussions into a contract.
And, what typically happens is that we'll have both parties will have the supplier will have various groups from the from your own company, procurement is probably still there, because they were closest to the process leading up until that point, we'll have the user we will have maybe someone from finance, but then what we'll also have probably for the first time is a legal team from both sides. And you know what, it's very unusual that it's an in-house legal team, it can be but more often than not, we're going to bring in a specialist outsourced legal service, who perhaps have expertise in contracts for the kind of product or service you're doing.
So here we are. We're going to capture our agreement for the provision of outsourced IT for a large multinational company. And we're now here for months. And we're here for months with daily weekly meetings. We'll go online, we'll go to both sites, we've got draft agreements, and we've got a dreaded master services agreement MSA with 20 appendices. And this document, not long into the process, seems to make a subtle transition from a document, which is about writing down what both sides have agreed to do. It turns into an exercise in checking full stops, semicolons and capital letters. We've got content, which is 80%, about obligations and what will happen if things aren't met, and 20%, about how we're practically going to work together. And what's happened is that a contract to capture a collaborative relationship to deliver, in this case a service, but it could be goods as well, has become a prenup. It's become an agreement that says we're going to do this stuff. But if and when it goes wrong, here is the handbook we're going to use to beat each other up with to make sure that we can either accept or get something rectified. And off it goes.
Matt: So if I understand you correctly, right? It's, at some point in time in the contracting process, the document that you create morphs from a handbook that you should have that tells you how do we best work together into a stick that you pull out and club each other over the head with if things are going wrong? Which invariably they will, because there's two parties working together. Why is that happening, Richard?
Richard: It's a great question. I mean, if you think about it, what happens after the contracts have been signed? I mean, we might get a few internal emails, saying, ‘Look, fantastic, we're going live!’ And, then we have the wonderful start of a game. And that game is where's the contract?
Oh, for those that are familiar with Where's Wally, how many of you may have seen that, you know, the cartoon pictures, 1000s of people. And somewhere hidden in the crowd is Wally wearing his red hat and his striped shirt, and you have to find him. So typically, what happens is the contract, once written, disappears. The user, the end user in your company probably hangs on to the one appendix that contains the key performance indicators, so uptime or service levels or whatever else, because that's what they need to focus on. But for everybody else, the contract just disappears on to a shared drive. And when something happens, we play Where's Wally, where's the contract, we try to find it. And invariably, no one has got a copy of the signed version, not even the lawyers seem to have a copy of the signed version. And we will run around, probably have to ask the supplier for a copy of it, which is quite embarrassing, but it's true. And we grab it, because something has gone wrong. And we now want to go and look at the document in order to find out what we're going to do about it.
Now, if that happens, within the first few months of a contract being signed, the chances are that everybody in the organization is completely familiar with the discussion, the intent and how it was captured. But, if you roll forward two years, there's a good chance that many of the people that were involved in setting it up have exited the building. So you have the situation where someone new in procurement, or in the end user team has got a problem has never seen the contract before digs it out. In the worst case goes and does search for keywords in the document, obligation penalty, whatever. And immediately, the only purpose and the only knowledge of that document is what they're reading on the screen in order to go and resolve whatever problem they've got. So it's almost inevitable that the document in the future is used by people who are not fully familiar with what it was trying to achieve, to resolve a problem. And when you're trying to resolve a problem, particularly it's even if it's in something critical. Like if you're a bank, and you've outsourced your IT and your data center goes down. That's critical. The whole atmosphere of the discussion is not collaborative. It is fix this now or I will do this because on the contract it says that I can do that. So I think that's why it makes that transition.
Matt: If the ultimate purpose, Richard, as you're saying it is to create value from a contract, then you're not only for yourself, but also for your provider, in particular, for the more complex relationship, it's a partnership, rather than a buyer seller relationship, then then if that is the ultimate purpose, creating value from that relationship, are organizations today structured in the right way to create that value for themselves together with their supplier partners?
Richard: If you like that split of organizational structure, and the physical document that you're using, actually lays at the heart of a lot of what's going on. Let me just let me just bring it back to a slightly different comparison. Think about two people going on a walk in the mountains. And you know, they go and park their car somewhere remote, and they get all their equipment ready, and they get out their map, and they plan their route, and they decide where they're going to go. Nobody, would then leave the map in the car, and then start walking. And then you know, several hours later, begin to have an argument about where they are, or where they've been or how they're going to get back. And then struggle to wonder how they're going to recover the map that they left in the car.
But this is exactly the behaviour that happens with contracts. Not only do we not use the document on a day to day basis, it only comes out when we've got a problem. And, for anybody that's done any kind of navigation with a map, it's a lot easier to work out what to do if you've been following it as you go along than it is to try to pick it up and work out where you are when you're lost.
The issue with the organizational structure is that this actually just makes the problem worse. If we think about the way that teams are organized, we have the commercial element, which could be a discrete part of the organization, or it could actually just be the end user, someone who's engaged with the business impact and benefit of whatever you've contracted for. You will have a legal team, either an in-house general counsel, and legal advisors, or you'll have an outsource partner, you'll have procurement. And there may be other stakeholders like finance, or even other end users. Now all of them came together when the contract was written. But in my analogy of the hillwalking, the minute the contract was signed, they basically agreed where they were going, and then they all set off in their own direction doing their own jobs again. And then somehow, when they're all discovered that they're lost. It's one of them, typically, the end user who says, ‘Look, this just isn't working for me, we're not getting what I need from the provider.’ Which is news to the other four, because they were unaware that anything was going wrong. It's like someone just firing a flare and saying, ‘I'm lost, come help me!’
At which point everybody discovers they're all lost, because none of them have had any involvement with the contract or the service since the contract was signed. So that organizational separation, which we kind of temporarily fixed when we're negotiating and signing the contract, becomes a real problem in the future when something goes wrong because nobody is aware that anything was a problem. And the biggest factor of all, is that if we could resolve that organizational separation, and not leave the map in the car, but use the map as we are going along. So using the contract as a handbook for the relationship, rather than a prenup, which we argue about when it goes wrong, we increase the opportunity for success. Because the reality is and you alluded to this earlier, stuff is going to go wrong.
Matt: Now, what would you say, Richard? Where should businesses start? If they want to improve the way that they create, host and use contracts in the future?
Richard: Another great question. I'm ex-military. So one of the truisms of, of anything involving the military, whether it's a peace support operation or conflict is that you simply can't predict what's going to happen. I mean, actually I'm probably going to get myself in a tangle here. But I think Clausewitz said no plan survives contact with the enemy,
Richard: Well, Moltke, thank you. No plan survives contact with the enemy. The funny thing is that we don't need to think about the enemy, we just need to think about business. Nobody's business survived contact with the pandemic. It changed everything, it changed delivery expectations, the way that we interact with one another, everything went out the window. Now, the way that the military deal with that, is they focus on training. If you're gonna, using my analogy of going for a mountain walk, as long as you've got the right map and the right equipment, and you're all trained with the right skills, then frankly, it doesn't matter if you come to a stream or a blocked path or whatever, you have the skills to be able to deliver it.
So for me, the start point is about culture, and about preparation. And that's not just internal, that's with your supplier as well. So I would be trying to break down the barriers between those separate teams in an organization. And what I've observed, many successful organizations don't really talk about legal or procurement or finance, they talk about commercial. It's a commercial mindset. You know, we exist as we bring different skills to the team. But our focus is on commercial success. The next bit is that if you've got that commercial team, then right at the outset, when you are sitting down in that dreaded room, and you're beginning to formulate the contract, what are we trying to achieve? What are the ways we're going to ensure that we have dialogue resolution discussion about anything that changes. And, that could just as well be problems that have arisen from something as dramatic as a pandemic, to something as positive as actually we need to add more, because things are going really well and we haven't got the capacity or we want to change the range of services. I mean, it's just a change for whatever driver.
So if you've got an organization where the boundaries have gone, it's a commercial team, and you are writing the contract, not with the intent of using it as a prenup, it's not going to change or when it goes wrong, I'm going to beat you. But writing it as a handbook for engagement, for the relationship that takes you through what we're trying to achieve, how we're going to discuss and review whether it's still appropriate, or whether something has changed externally, that makes us need to do something differently. With a positive way of talking that actually encourages ongoing engagement with the supplier by those broader teams to understand how things are going. Then you're going to see that shift from the contract being less of an inch thick, who, what, where, when into thinner documents that are focused on outcomes, dialogue, performance standards, of course and naturally, we're still going to have to have the what if something becomes terminally wrong? How are both parties confident that they have the ability to get recompense?
Matt: So there are a few ingredients to success here then, right? One is the operating model. And another one is then obviously on top of that culture and training, training people in the new roles. I'm wondering, Richard, what's the importance of technology versus these more process and culture success factors in driving value from… in creating contract the light, if you will, rather than contract paid?
Richard: Your right to pick me up on this? And, there is a deliberate reason that I have not mentioned it so far. I talked a little earlier about Where's Wally, the ability to even find a contract when something's gone wrong, to be able to do something about it as a prenup. The technology is there to support us and to help us get to where we want. And the truth is that if today I am at stage zero, I don't know where my contracts are. They're on SharePoint, email, printed copies. My teams are all separate. They don't have that commercial focus. If I take the brave decision to spend a lot of money and bring in some kind of fully integrated Contract Lifecycle Management tool, I will spend a lot of money, I will spend a lot of time I will probably achieve nothing because I've literally tried to take a stage zero to a stage 10 in one leap. And it's a bit like really blunt analogy. It's trying to get cavemen around a fire, to run the next moonshot in 2025. You're trying to achieve that much of a leap.
And, I know that's an exaggeration, but actually isn't because if you look at what's involved in any implementation of technology, it's going to have process problems, it's going to require people to understand new ways of working, it's going to have to find the documents, let alone the horsepower to get everything in there. All that happens is you lose sight of what you're trying to achieve commercially great management of a relationship where the contract is a support. And, it becomes an exercise in capturing documents in terms and making it all ‘press of a button’. Those two things don't go together.
So the approach to technology has to be appropriate to where your start point is. For many companies, it is a huge leap of progress simply to have your contracts organized in one place where people can find them. If nothing else, even to the days when we used to have paper folders, having your folder that contains contracts A to Z would be a brilliant first step. Of course, we're beyond that we can get them on SharePoint, the supplier will have plenty of the same thing with theirs as well.
Matt: So it seems what you're saying, Richard obviously, right, is the role that technology can play in that orchestra of their new creation is obviously different depending on the maturity level of the organization, right? And it starts with, as you said, a just a basic contract with repository, it then probably built into a contract creation process where you can work together different parties within your organization and another organization, and then use the have some functionality that you can use to, to use it as a living document and not so much as the stick that you pull out later. From your experience, what is the best application of contracting technology that you have seen?
Richard: Well beyond the first one, which is being able to find them. So actually technology to help you store and retrieve your contract. As I said, it is an essential first step. Beyond that, the next step is whether technology can help you to understand what you're supposed to be getting, and what you're supposed to be doing with your obligations to the supplier. But also those key data, those key bits of information metadata, like, when things end, because if you're coming, if you're blindly walking to the end of a contract, you probably need to do something about it.
So like the analogy to climbing the stairs, to get to a great commercial agreement, contract, I would say look, first step, use technology to help you get organized, know where your contracts are. Secondly, once you've got them under control, use technology to help you pull out the key data that matters for the living, breathing service that you're expecting from your supplier. What are they going to give you? What have you got to get them? How are you going to discuss stuff? What are the key dates? The next step is well, okay, how can technology help us to have good contracts in the first place. And this could be at one end simple templates at the top end, it could be clause banks that allow you to build bespoke contracts, using industry standard terminology, at the final step, which is probably where we begin to move from dumb systems to artificial intelligence supported systems.
It's where we're using an AI based tool to enable you to identify opportunities for value. And there are in my book, there are sort of three key areas that, you know, it can do that. Firstly, are your contracts simple and best practice? You know, if you have access to technology that can help you make sure that what you're asking for is appropriate. If I come back to my IT example, there are many organizations that have dug out some dusty contract from the 90s about, you know, on premise infrastructure and tried to use it as the basis for a contract with one of the big cloud service providers. And it's nonsense. You're not even aware that you're completely playing on the wrong Park.
The second part is that AI can look at performance, if you have the ability to connect to other systems, financial systems or KPI monitoring systems, you've got the opportunity for technology to look at whether you're getting what you should have been getting.
And, the third part, which is if I come back to that analogy of two questions, am I getting what I'm supposed to be getting? Is what I need the same as it was before? AI has the ability to look at the broader market, in the particular category, product or service that you're getting, to observe whether things are changing. So again, if we talk about, IT provision, IT outsourcing. If you've got a wonderful contract for the provision of a maintenance on premise, and it's working brilliantly, you'd expect your AI to be supporting you to say, the market is moving in a different direction; companies of your type are not doing on premise, they’re moving to cloud.
And it's that fourth level, which is, I'll tell you what, that is beyond the majority of companies today, because those first three steps have to be done. But that fourth step, where AI can help you keep it relevant, make sure it's performing, and just give you indicators as to whether it's even appropriate in the marketplace anymore.
Matt: Last question Richard, what is your final tip? What's your actionable advice? Where should people start? What should they do? If they want to, I'm taking your picture from before embarking on their journey of building their CLM muscle creating more value from contracts?
Richard: Lovely question. Actually, the answer is the very last thing you said: recognize that there is value in embarking on this journey, because there is its huge value. And, once you've identified something is valuable, you do what you do for anything else, you set up the team that are going to make that change and to guide you through that change. And you know, there is a lot of expertise out there.
Matt: Lovely advice, Richard, if nothing helps, talking, always helps in order to get started on a very exciting journey. You might say, Richard, thank you so much for being with us today. That was really lovely. And I'm looking forward to additional conversations that we may have with you. Thank you so much
Richard: Mattias, it was a pleasure. Have a great day.
Matt: So everyone, that was Richard Beaumont, giving us his unique perspective on how contracts should be looked at as a handbook for a better relationship, rather than a prenup you pull out when things have gone wrong, and how technology can help the well the different stages of maturity in your journey to contract management excellence.
Like what you heard today, there are more interesting conversations with industry leaders in the upcoming episodes. So stay tuned and catch us on the next episode of Clause & Effect Subscribe to the podcast and visit SimpliContract.com for more information. See you all soon.